June 26, 2011

WeeklyBasis 6/26: Greece Problem In Simple Terms

June 26, 2011

WeeklyBasis 6/26: Greece Problem In Simple Terms

Last Saturday’s WeeklyBasis said rates should be even but could rise slightly on Greece debt crisis progress and Bernanke confirming a June 30 end to QE rate stimulus. Rates actually dropped slightly as Greece worries persist, Bernanke threw up his hands on the jobless conundrum, and weak economic data prevailed: 1.9% GDP for 1Q2011, weekly jobless claims up 9000, FHFA year-over-year home prices -5.7, and a 6mo low for existing home sales.

Rates closed Friday just above the 2011 low set June 8, and below is a preview of this week’s market activity which should keep rates in this range.

Monday is the Fed’s preferred consumer inflation measure. May’s Personal Consumption Expenditures index should confirm flat consumer inflation with and without food and energy prices included. Rates even or better.

Tuesday is the April Case Shiller home price report, which markets consider the most broad home price report. The March report confirmed home prices fell to an eight year low, and home sales reports of recent months don’t suggest the demand that will push any upside price surprise for April. Rates even or better.

Wednesday brings the latest on home sales. NAR’s May Pending Home Sales reports on homes entered into contract during May and are expected to close. No positive surprises expected from this report, and even if there was, it’s still not quite the market moving report that last week’s new and existing closed sales reports are because these new contracts can still not close. Rates even.

Also Tuesday and Wednesday bring $64b in new Treasury supply to bond markets with $35b 5yr Note and $29b 7yr Note auctions respectively. New supply can rattle mortgage bond investors but probably not this week since QE2 finishes up and other data outweigh this as a concern. Rates even.

Thursday and Friday bring June’s regional Chicago and national manufacturing survey reports respectively. Both surveys are done by the Institute for Supply Management and give markets current projected activity levels plus some inflation information. Activity and inflation has backed off the past two months, and June surveys are likely to show the same. Rates even or better.

All week Greece will be a hot topic as their government resumes debates Monday over a five year, $39.7b tax hike and spending cut plan needed to tap into their $156b EU/IMF bailout funds for debt payments due next month.

Even though Greece would default without these funds, the debate rates because citizens are facing both higher taxes and pay cuts. Reuters reports that many Greeks have already lost jobs or seen their real income decline by nearly one-fifth over the last two years.

The unions who organize massive protests to apply pressure during government deliberations have a point when they argue that more austerity will make matters worse.

Still, if an austerity resolution isn’t reached, the contagion could more quickly spread to other vulnerable Euro countries. If more austerity comes, there will be more chaos on Greek streets.

The net for U.S. rates next week is even to better. Stay tuned on daily developments.